Business

Avis Budget Drives Sales, Profits With Europe Business Buy

An Avis car rental lot at London's Heathrow Airport. Avis Budget Group has bought Avis Europe and hopes to expand further in Europe. View Enlarged Image

Some companies search far and wide for a winning acquisition candidate.

But the folks at Avis Budget Group (CAR) found one in their own backyard. In October 2011 , the operator of the Avis and Budget rental car brands acquired its independently owned licensee, Avis Europe, which operated Avis and Budget in Europe, Africa and the Middle East, and just Avis in Asia.

Avis Budget paid roughly $1 billion for the European licensee. The buy brought a lot to the table, including revving up the company's global expansion and accelerating its growth engine.

"The key to our ability to generate growth through global expansion obviously stems from our acquisition of Avis Europe last year," said Avis Budget spokesman John Barrows via email. "We now control the brand proposition on a global basis, which provides a number of opportunities."

Barrows says the buy gives Avis Budget the opportunity to ensure brand "consistency." The idea, he adds, is to create a more consistent customer experience for each brand, which is something travelers value higher than almost anything else.

Brand Growth

Another key benefit: With Avis Europe in the mix, the company has the opportunity to pursue brand growth, such as the Budget brand in Europe, where the company had a share of the rental car market of roughly 8 percentage points or more behind other developed territories where it operates Budget.

"I would say the Avis Europe acquisition was pretty transformational," adds Northcoast Research analyst John Healy.

The biggest opportunity, he says, is to expand the Budget brand across Europe, where he estimates it has a roughly 2% share of the market. He says Budget is a very strong player everywhere outside of Europe, with a market share in the double digits in places such as the U.S. and Latin America.

Every 1% of incremental market share gained by the Budget brand in Europe could equate to roughly 10 cents to 15 cents in incremental earnings, Healy estimated in a recent report.

"Although economic head winds in Europe persist, we continue to believe that initiatives by Avis to expand the Budget brand in Europe as well as other initiatives will continue to bolster profits," he added.

The company's initial target is to get Budget to a 5% market share in Europe, which is still half of what it is in the U.S., said Chief Executive Ronald Nelson on the third-quarter conference call.

"Third-quarter results would suggest the target is reasonable, as Budget accounted for nearly 13% of our European volume in the quarter, vs. only 5% a year ago," he said. "As a reminder, each share point equals roughly $100 million of revenues, and the opportunity here can be quite large."

Having Avis Europe under the corporate umbrella works to Avis Budget's advantage in other ways. With Avis Europe in the mix, Avis Budget is able to be a "single-source provider" for multinational accounts that want procurement, says Barrows.

And, he adds, Avis Budget can now benefit from the leadership presence established for Avis in places like India and China.

The company expects to have 100 locations in China by the end of this year, which Barrows says would be well above the number of locations there of any other international rental car company.

The Avis and Budget rental car suppliers serve different segments of the market. Avis serves the premium commercial and leisure segments of the travel industry. Budget competes within value-conscious segments of the industry in the U.S. and other regions, and as a premium brand in Canada, the Caribbean and other parts of the world. Budget also operates a truck rental business in the U.S.

Avis Budget provides a full range of vehicle rental services through 10,000 rental locations in approximately 175 countries around the world.

After a tough haul during the recession, its business hit a trough in 2009 and has been on the comeback trail since with some nice growth this year. Sales have been up by double digits the past four quarters. And earnings have risen at that rate the past two quarters.

In North America, revenue rose 2%, primarily due to a 4% increase in volume and a 7% increase in ancillary revenues, partially offset by a 3% year-over-year decline in pricing.

On the international front, revenue, excluding Avis Europe, grew 1% as a result of a 2% increase in volume and increased licensee royalty revenue, partially offset by a 3% decline in reported pricing due primarily to currency effects. Including the Avis Europe buy, international revenue soared more than 300%.

In Europe, the company saw positive volume growth, driven by strong leisure demand spurred by the expansion of Budget, said CFO David Wyshner on the conference call. Corporate demand continued to be soft, which is probably more reflective of the economic challenges, he added.

Growth Initiatives

Analysts polled by Thomson Reuters see full-year earnings rising 47% to $2.42 a share. They expect a 4% increase in 2013.

Avis Budget is reaping the benefits of several initiatives to drive growth. They include efforts to grow its small-business customer base, to substantially improve the profitability of its off-airport business, and to capture a higher proportion of high-margin cross-border travel, Barrows says. These are among the company's most profitable segments, says Barrows.

Its strategy also includes new brand marketing campaigns for both Avis and Budget that were launched in 2012, and an ongoing focus on increasing sales of ancillary products and services, such as GPS rentals.

It's also made a push to improve efficiency using tools such as Six Sigma on more than 500 different project deployments in 2011. Six Sigma is a set of tools and strategies for process improvement. The projects were primarily focused on enhancing operational efficiency, driving incremental revenue, reducing fleet depreciation and fleet maintenance costs, and improving the Avis and Budget customer experience, Barrows says.